Smelters and foundries need support to survive

Smelters and foundries need support if they are to survive. As a start, Eskom has to sort out its electricity supply problems, and government’s R4 trillion infrastructure plan needs to get under way soon, according to reports in the Business Day.

Better still, the private sector should be encouraged to provide more traditionally sourced energy.

BHP Billiton has turned off its Bayside aluminium smelter in KwaZulu-Natal. Smelting costs too much, even though the company has a hugely preferential electricity pricing agreement with Eskom.

Bayside, BHP Billiton’s Hillside aluminium smelter and the Mozal smelter near Maputo in Mozambique together used about 9% of South Africa’s total electricity output.

A chunk of state infrastructure funding is being spent on building new energy capacity — mainly the delayed Medupi and Kusile coal-fired power stations, but also the Ingula hydropower project in KwaZulu-Natal.

The manufacturing sector is under pressure from strikes, above-inflation wages and increases in administered prices, as well as poor maintenance and development of infrastructure.

Smelters and foundries cannot run without a consistent supply of competitively priced electricity or gas to produce common metals such as aluminium and cast iron. Sasol’s monopoly on gas pricing adds to these competitive woes.

Smelters produce large volumes of molten metals from ores and downstream foundries process scrap metals. These processes make an array of products for industries including aerospace, electrical engineering, transport, containers and packaging and, especially, construction.

Bronze, brass, steel, magnesium and zinc produce castings of different qualities, shapes and sizes. These can be recycled in secondary smelters through remelting scrap metals. But many intermediate costs are involved, including for metals separation.

Alloys are closely associated with the iron and steel industry, which is also the main consumer of ferroalloys — alloys of iron with a high proportion of one or more elements such as manganese, aluminium and silicon.

The leading producers of ferroalloys are China, South Africa, Norway, Russia and Ukraine.

Much of the world’s ferrochrome, an alloy of chromium and iron used mainly in stainless steel production, is produced in South Africa, Kazakhstan, India and Turkey.

China’s entry into these markets has hugely altered the global balance. It has replaced South Africa as the top producer and Russia is catching up.

South Africa is the largest exporter of raw chromite ore to China and holds by far the world’s largest reserves. However, its exports of beneficiated ferrochrome to China are rapidly declining as a result of expensive and erratic electricity supply, and other rising costs. This is completely at odds with the government’s industrial growth plans.

China produces half the world’s steel, much of it used in manufacturing cars, industrial machinery and construction. This has pitted South African chrome ore producers — including platinum miners, which produce chrome as a byproduct — against the country’s ferrochrome producers over the export of “cheap” chrome ore.

The government is looking to impose cost-plus production agreements and export tariffs on industrial inputs including “strategic” minerals and scrap metals, to beneficiate raw materials.

Hernic Ferrochrome in the North West, which operates some of the largest ferrochrome furnaces in the world — some of which are shut at times for lack of power — says South Africa’s alloy smelting industry has significantly consolidated and rationalised in recent years.

The ferrochrome industry added new capacity last year, with local and foreign investment in FerroChrome furnaces near Rustenburg.

“The demand for ferroalloys is still growing in China and stable demand remains from Europe and the US, so the capacity utilisation of available smelters remains high,” Hernic Ferrochrome spokesman Samson Mafoane says.

He says all the ferrochrome smelters have arrangements with Eskom to cut back use during peak hours when asked to do so. The “massive tariff increases” for electricity over the past five years caused the industry “to remain marginal”, he says.

Some furnaces are used to smelt more competitive alloys but producers are also looking to establish lower-cost operations outside South Africa, in Malaysia and China, he says.

China is commissioning significant ferroalloy capacities that will keep the lid on ferrochrome price rises over the next two years, according to industry analysts.

“This increased capacity requires more raw material, of which South African suppliers will continue to export and share in the additional volumes,” Mr Mafoane says, but it raises alloy production costs.

Scrap metal ‘unaffordable’
The scrap metals industry has a complex and often adversarial relationship with the foundries industry. Many countries impose duties to prevent exports of scrap metals, while also heavily subsiding their metals industries, despite World Trade Organisation rules.

But South Africa has gone in the opposite direction since 1994, liberalising markets to the point that some in the private sector are pleading for protection, though others are baying for more open markets.

Bob Stone, chairman of the Non-Ferrous Metal Industries Association of South Africa, says inputs for metals producers, especially scrap metals, are not affordable.

Apart from tariffs, antidumping duties and subsidies elsewhere, market inequities are driven by high foreign demand and a highly favourable exchange rate for scrap exporters, which also charge local buyers export parity prices.

The Metal Recyclers Association of South Africa declines to comment — it is sensitive to accusations that it is involved in metals theft and that it is ignoring a government directive to offer product to local foundries and secondary smelters at a 20% discount to the international spot price.

The International Trade Administration Commission says it will soon issue new guidelines for the compulsory sale of ferrous and nonferrous scrap metals to the domestic market to stem exports worth billions annually.

John Davies, CEO of the South African Institute of Foundrymen, says the foundry industry remains under pressure.

“However, if we can get the localisation programme really working well, it could provide impetus to the industry and make a real difference,” he says.

A decade of decline for embattled but crucial foundries
South Africa’s foundries have been in decline for more than a decade though there are still some centres of excellence.

About 180 companies are involved in alloying metals for a wide variety of applications and about 20 produce the bulk of the output, mostly for the automotive sector.

South Africa had about 450 foundries in the 1980s and just over 200 in 2003. Between 2007 and 2011 another 13% closed and employment in the industry declined by 30%.

Mark Krieg, executive director of the Aluminium Federation South Africa, says the metals castings industry has been in “dramatic decline”. This includes nonferrous metals such as aluminium and copper, and ferrous metals with a high iron content.

The recent turmoil in the mining sector contributed to a big drop in demand for digging-machine blades and ore-truck compartments capable of carrying loads of hundreds of tons; and grinding media — metal balls that crush rocks. Strikes also resulted in imports replacing the production of goods such as manhole covers, pumps and valves.

“The foundry sector is one of the foundation stones for all manufacturing, and also tool and die making,” he says.

Tool and die making involves artisanal machinists making jigs, dies, moulds, machine tools, cutting tools, gauges and other products used in manufacturing ranging from cellphones to aircraft.

Mr Krieg says manufacturers need to produce in volume to compete with imports and to create economies of scale. Short-term tariff protections are needed to help establish industries. “Plug some of the holes with regard to import duties,” he says.

More efficient use of energy and a loosening of punishing environmental protection policies will help the industry, he says. South Africa also needs much-improved skills education and technology innovation.

Some of South Africa’s iron casting furnaces are 25 years old. In China, these average seven years. Mr Krieg says there is a mismatch between South Africa’s scrap metal inputs and the latest foundry technologies. “We are getting poor quality at a premium price,” he says.

The industry is at a crossroads, says Scaw Metals. “Due to the continuing poor local demand over the last couple of years, the remaining players have not invested in the required capital equipment and new technologies,” Ufikile Khumalo, Scaw’s executive chairman, says.

The increasing input cost of raw materials and electricity, poor and inconsistent local demand for foundry products, and rising imports are all contributing to the decline.